International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Thursday, January 10, 2019

State aid: Commission opens in-depth investigation into tax treatment of Nike in the Netherlands

The European Commission has opened an in-depth investigation to examine whether tax rulings granted by the Netherlands to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules.

Margrethe Vestager, Commissioner in charge of competition policy, said: "Member States should not allow companies to set up complex structures that unduly reduce their taxable profits and give them an unfair advantage over competitors. The Commission will investigate carefully the tax treatment of Nike in the Netherlands, to assess whether it is in line with EU State aid rules. At the same time, I welcome the actions taken by the Netherlands to reform their corporate taxation rules and to help ensure that companies will operate on a level playing field in the EU."

The Commission's formal investigation concerns the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develop, market and record the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region).

Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to, respectively, Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are "transparent" for tax purposes (i.e., not taxable in the Netherlands).The Nike group's corporate structure itself is outside the remit of EU State aid rules.

From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property.

As a result of the rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. At this stage, the Commission is concerned that the royalty payments endorsed by the rulings may not reflect economic reality. They appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordancewith the arm's length principle.

In particular, a preliminary analysis of the companies' activities found that:

  • Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities.
  • In contrast, the recipients of the royalty are Nike group entities that have no employees and do not carry out any economic activity.

The Commission investigation will focus on whether the Netherlands' tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV since 2006. As a result, the Netherlands may have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid.

The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.

infograph

The infographic is available in high resolution here.

 

Background

Nike is a US based company involved worldwide in the design, marketing and manufacturing of footwear, clothing, equipment and accessories, in particular in the sports area.

Tax rulings as such are not a problem under EU State aid rules if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective advantage to specific companies can distort competition within the EU's Single Market, in breach of EU State aid rules.

Since June 2013, the Commission has been investigating individual tax rulings of Member States under EU State aid rules. It extended this information inquiry to all Member States in December 2014.

The following investigations concerning tax rulings have already been concluded by the Commission:

  • In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. As a result of these decisions, Luxembourg recovered €23.1 million from Fiat and the Netherlands recovered €25.7 million from Starbucks.
  • In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, under its "excess profit" tax scheme are illegal under EU State aid rules. The total amount of aid to be recovered from 35 companies is estimated at approximately €900 million, including interest. Belgium has already recovered over 90% of the aid.
  • In August 2016, the Commission concluded that Ireland granted undue tax benefits to Apple, which led to a recovery of €14.3 billion by Ireland.
  • In October 2017, the Commission concluded that Luxembourg granted undue tax benefits to Amazon, which led to a recovery by Luxembourg of €282.7 million.
  • In June 2018, the Commission concluded that Luxembourg granted undue tax benefits to Engie of around €120 million. The recovery procedure is still ongoing.
  • In September 2018, the Commission found that the non-taxation of certain McDonald's profits in Luxembourg did not lead to illegal State aid, as it is in line with national tax laws and the Luxembourg-US Double Taxation Treaty.
  • In December 2018, the Commission concluded thatGibraltar granted undue tax benefits of around €100 million to several multinational companies, through a corporate tax exemption scheme and through five tax rulings. The recovery procedure is ongoing.

The Commission also has an ongoing in-depth investigation concerning tax rulings issued by the Netherlands in favour of Inter IKEA and an investigation concerning a tax scheme for multinationalsin the United Kingdom.

In addition to implementing comprehensively the Anti-Tax Avoidance Directives (ATAD I and ATAD II), the Netherlands have announced plans for a broad reform tightening the requirements for tax rulings concerning international structures. For example, no rulings will be granted if a tax structure involves a tax haven or if the purpose of the ruling is essentially to avoid Dutch or foreign taxes. Moreover, to enhance transparency and consistency, all Dutch tax rulings involving international structures will be centrally managed and monitored, and the tax authorities will publish an anonymous summary of all these rulings. Finally, the Netherlands have also announced plans to introduce a withholding tax on interest and royalty payments made to companies in tax havens.  

The non-confidential version of the decision will be made available under the case number SA.51284 in the State aid register on the Commission's Competition website once any confidentiality issues have been resolved. New publications of State aid decisions on the internet and in the Official Journal are listed in the State Aid Weekly e-News.

Brussels, 10 January 2019

January 10, 2019 in BEPS | Permalink | Comments (0)

Thursday, December 13, 2018

What's in the IRS'​ proposed BEAT regulations? Part II: Tax Treaties and SCM Addressed.

The Internal Revenue Service issued 193 pages of proposed regulations today on the IRC section 59A base erosion and anti-abuse tax ("BEAT").  New Internal Revenue Code (IRC) section 59A imposes a tax equal to the base erosion minimum tax amount for certain taxpayers beginning in tax year 2018.

The Base Erosion and Anti-Avoidance Tax targets companies that potentially reduce their U.S. federal income tax liability through cross-border payments to their foreign affiliates. Under BEAT, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year on base erosion payments that are deductible payments made by certain corporations to their non-U.S. affiliates.

The base erosion percentage is determined for any taxable year by dividing the deductions taken by the applicable taxpayer with respect to its “base erosion payments” by the overall amount of deductions taken by the corporation (including deductions taken with respect to “base erosion payments,” but excluding net operating loss carrybacks and carryforwards, deductions for dividends attributable to foreign earnings, deductions in connection with GILTI and FDII, deductions for payments for certain services and deductions for “qualified derivative payments”. If the base erosion percentage is at least three percent (or two percent in the case of a bank or security dealer), then the taxpayer may be subject to BEAT.

The base erosion minimum tax amount is equal to the excess of (a) the product of the applicable base erosion tax rate and an applicable taxpayer’s modified taxable income, over (b) the applicable taxpayer’s regular tax liability reduced by certain credits. Credits cannot be applied against the base erosion minimum tax amount.6 BEAT is a five percent rate in 2018, a 10 percent rate from 2019 until 2025, and a 12.5 percent rate for all years thereafter. Banks or a registered securities dealer endure one percent higher BEAT rate than regular applicable taxpayers.

Impact of Income Tax Treaties On U.S. Permanent Establishments

Certain U.S. income tax treaties provide alternative approaches for the allocation or attribution of business profits of an enterprise of one contracting state to its permanent establishment in the other contracting state on the basis of assets used, risks assumed, and functions performed by the permanent establishment. The use of a treaty-based expense allocation or attribution method does not, in and of itself, create legal obligations between the U.S. permanent establishment and the rest of the enterprise. These proposed regulations recognize that as a result of a treaty-based expense allocation or attribution method, amounts equivalent to deductible payments may be allowed in computing the business profits of an enterprise with respect to transactions between the permanent establishment and the home office or other branches of the foreign corporation (“internal dealings”). The deductions from internal dealings would not be allowed under the Code and regulations, which generally allow deductions only for allocable and apportioned costs incurred by the enterprise as a whole. The proposed regulations require that these deductions from internal dealings allowed in computing the business profits of the permanent establishment be treated in a manner consistent with their treatment under the treaty-based position and be included as base erosion payments.

The proposed regulations include rules to recognize the distinction between the allocations of expenses. In the first instance, the allocation and apportionment of expenses of the enterprise to the branch or permanent establishment is not itself a base erosion payment because the allocation represents a division of the expenses of the enterprise, rather than a payment between the branch or permanent establishment and the rest of the enterprise. In the second instance, internal dealings are not mere divisions of enterprise expenses, but rather are priced on the basis of assets used, risks assumed, and functions performed by the permanent establishment in a manner consistent with the arm’s length principle. The approach in the proposed regulations creates parity between deductions for actual regarded payments between two separate corporations (which are subject to IRC Section 482), and internal dealings (which are generally priced in a manner consistent with the applicable treaty and, if applicable, the OECD Transfer Pricing Guidelines). The rules in the proposed regulations applicable to foreign corporations using this approach apply only to deductions attributable to internal dealings, and not to payments to entities outside of the enterprise, which are subject to the general base erosion payment rules as provided in proposed §1.59A-3(b)(4)(v)(A).

Exception from BEAT Payment with Respect to Services Cost Method

The SCM exception described in IRC Section 59A(d)(5) provides that IRC Section 59A(d)(1) (which sets forth the general definition of a base erosion payment) does not apply to any amount paid or accrued by a taxpayer for services if (A) the services are eligible for the services cost method under IRC Section 482 (determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure) and (B) the amount constitutes the total services cost with no markup component.

The Treasury Department and the IRS interpret “services cost method” to refer to the services cost method described in §1.482-9(b), interpret the requirement regarding “fundamental risks of business success or failure” to refer to the test in §1.482-9(b)(5) commonly called the business judgment rule, and interpret “total services cost” to refer to the definition of “total services costs” in §1.482-9(j). IRC Section 59A(d)(5) is ambiguous as to whether the SCM exception applies when an amount paid or accrued for services exceeds the total services cost, but the payment otherwise meets the other requirements for the SCM exception set forth in IRC Section 59A(d)(5). Under one interpretation of IRC Section 59A(d)(5), the SCM exception does not apply to any portion of a payment that includes any mark-up component. Under another interpretation of IRC Section 59A(d)(5), the SCM exception is available if there is a markup, but only to the extent of the total services costs. Under the former interpretation, any amount of markup would disqualify a payment, in some cases resulting in dramatically different tax effects based on a small difference in charged costs. In addition, if any markup were required, for example because of a foreign tax law or non-tax reason, a payment would not qualify for the SCM exception. Under the latter approach, the services cost would continue to qualify for the SCM exception provided the other requirements of the SCM exception are met. The latter approach to the SCM exception is more expansive because it does not limit qualification to payments made exactly at cost.

The proposed regulations provide that the SCM exception is available if there is a markup (and if other requirements are satisfied), but that the portion of any payment that exceeds the total cost of services is not eligible for the SCM exception and is a base erosion payment. The Treasury Department has determined that this interpretation is more consistent with the text of IRC Section 59A(d)(5). Rather than require an all-or-nothing approach to service payments, section 59A(d)(5) provides an exception for “any amount” that meets the specified test. This language suggests that a service payment may be disaggregated into its component amounts, just as the general definition of base erosion payment applies to the deductible amount of a foreign related party payment even if the entire payment is not deductible.[1]

The most logical interpretation is that a payment for a service that satisfies subparagraph (A) is excepted up to the qualifying amount under subparagraph (B), but amounts that do not qualify (i.e., the markup component) are not excepted. This interpretation is reinforced by the fact that IRC Section 59A(d)(5)(A) makes the SCM exception available to taxpayers that cannot apply the services cost method described in §1.482-9(b) (which permits pricing a services transaction at cost for IRC Section 482 purposes) because the taxpayer cannot satisfy the business judgment rule in §1.482-9(b)(5). Because a taxpayer in that situation cannot ordinarily charge cost, without a mark-up, for transfer pricing purposes, failing to adopt this approach would render the parenthetical reference in IRC Section 59A(d)(5)(A) a nullity. The interpretation the proposed regulations adopt gives effect to the reference to the business judgment rule in IRC Section 59A(d)(5). The Treasury Department and the IRS welcome comments on whether the regulations should instead adopt the interpretation of IRC Section 59A(d)(5) whereby the SCM exception is unavailable to a payment that includes any mark-up component.

To be eligible for the SCM exception, the proposed regulations require that all of the requirements of §1.482-9(b) must be satisfied, except as modified by the proposed regulations. Therefore, a taxpayer’s determination that a service qualifies for the SCM exception is subject to review under the requirements of §1.482-9(b)(3) and (b)(4), and its determination of the amount of total services cost and allocation and apportionment of costs to a particular service is subject to review under the rules of §1.482-9(j) and §1.482-9(k), respectively.

Although the proposed regulations do not require a taxpayer to maintain separate accounts to bifurcate the cost and markup components of its services charges to qualify for the SCM exception, the proposed regulations do require that taxpayers maintain books and records adequate to permit verification of, among other things, the amount paid for services, the total services cost incurred by the renderer, and the allocation and apportionment of costs to services in accordance with §1.482-9(k). Because payments for certain services that are not eligible for the SCM due to the business judgment rule or for which taxpayers select another transfer pricing method may still be eligible for the SCM exception to the extent of total services cost, the record-keeping requirements in the proposed regulations differ from the requirements in §1.482-9(b)(6).[2] Unlike §1.482-9(b)(6), the proposed regulations do not require that taxpayers “include a statement evidencing [their] intention to apply the services cost method to evaluate the arm's length charge for such services,” but the proposed regulations do require that taxpayers include a calculation of the amount of profit mark-up (if any) paid for the services. For purposes of qualifying for the SCM exception under IRC Section 59A(d)(5), taxpayers are required to comply with the books and records requirements under these proposed regulations but not §1.482-9(b)(6).

The proposed regulations also clarify that the parenthetical reference in IRC Section 59A(d)(5) to the business judgment rule prerequisite for applicability of the services cost method -- “(determined without regard to the requirement that the services not contribute significantly to fundamental risks of business success or failure)” -- disregards the entire requirement set forth in §1.482-9(b)(5) solely for purposes of IRC Section 59A(d)(5).

[1] IRC § 59A(d)(1).

[2] Treas. Reg. §1.59A-3(b)(3)(i)(B)(2).

December 13, 2018 in BEPS, Tax Compliance | Permalink | Comments (0)

IRS issues proposed regulations on key new international provision, the base erosion and anti-abuse tax

The Internal Revenue Service issued 193 pages of proposed regulations today on the IRC section 59A base erosion and anti-abuse tax ("BEAT").  New Internal Revenue Code (IRC) section 59A imposes a tax equal to the base erosion minimum tax amount for certain taxpayers beginning in tax year 2018. When applicable, this tax is in addition to the taxpayer’s regular tax liability. This new provision will primarily affect corporate taxpayers with gross receipts averaging more than $500 million over a three-year period who make deductible payments to foreign related parties.

The Base Erosion and Anti-Avoidance Tax targets companies that potentially reduce their U.S. federal income tax liability through cross-border payments to their foreign affiliates.1 Under BEAT, an applicable taxpayer is required to pay a tax equal to the base erosion minimum tax amount for the taxable year on base erosion payments that are deductible payments made by certain corporations to their non-U.S. affiliates.

An “applicable taxpayer” is a corporation other than a regulated investment company (“RIC”), a real estate investment trust (“REIT”), or an S corporation, which has average annual gross receipts for a three taxable-year period of at least $500 million dollars, and the base erosion percentage is three percent (or two percent in the case of a bank or security dealer).2

The base erosion minimum tax amount is, for 2019 through 2025, the excess of 10 percent of the modified taxable income of the applicable taxpayer for the taxable year over an amount equal to the regular tax liability of the taxpayer for the taxable year reduced by the excess of allowable tax credits.3 The tax credits allowed are (a) the credit allowed under I.R.C. section 38 for the research credit, plus (b) the portion of the applicable I.R.C. section 38 credits not in excess of 80 percent of the lesser of the amount of such credits or the base erosion minimum tax amount.

“Base erosion payment” means (a) any amount paid or accrued by a taxpayer to a related foreign person and with respect to which a deduction is allowable; (b) any amount paid or accrued by the taxpayer to a related foreign person in connection with the acquisition by the taxpayer from such person of depreciable or amortizable property; (c) certain reinsurance premiums paid to a related party; and (d) certain payments to expatriated entities that are “surrogate foreign corporations” or their related foreign persons.4 Base erosion payments do not include “qualified derivative payments”, payments with respect to certain services, or payments for cost of goods sold.

The base erosion percentage is determined for any taxable year by dividing the deductions taken by the applicable taxpayer with respect to its “base erosion payments” by the overall amount of deductions taken by the corporation (including deductions taken with respect to “base erosion payments,” but excluding net operating loss carrybacks and carryforwards, deductions for dividends attributable to foreign earnings, deductions in connection with GILTI and FDII, deductions for payments for certain services and deductions for “qualified derivative payments”.5 If the base erosion percentage is at least three percent (or two percent in the case of a bank or security dealer), then the taxpayer may be subject to BEAT.

The base erosion minimum tax amount is equal to the excess of (a) the product of the applicable base erosion tax rate and an applicable taxpayer’s modified taxable income, over (b) the applicable taxpayer’s regular tax liability reduced by certain credits. Credits cannot be applied against the base erosion minimum tax amount.6 BEAT is a five percent rate in 2018, a 10 percent rate from 2019 until 2025, and a 12.5 percent rate for all years thereafter. Banks or a registered securities dealer endure a one percent higher BEAT rate than regular applicable taxpayers.7

The proposed regulations provide detailed guidance regarding which taxpayers will be subject to section 59A, the determination of what is a base erosion payment, the method for calculating the base erosion minimum tax amount, and the required base erosion and anti-abuse tax resulting from that calculation. The proposed regulations include an explanation of the new provisions as follows:

  • Part II describes the rules in proposed §1.59A-2 for determining whether a taxpayer is an applicable taxpayer on which the BEAT may be imposed.
  • Part III describes the rules in proposed §1.59A-3(b) for determining the amount of base erosion payments.
  • Part IV describes the rules in proposed §1.59A-3(c) for determining base erosion tax benefits arising from base erosion payments.
  • Part V describes the rules in proposed §1.59A-4 for determining the amount of modified taxable income, which is computed in part by reference to a taxpayer’s base erosion tax benefits and base erosion percentage of any net operating loss deduction.
  • Part VI describes the rules in proposed §1.59A-5 for computing the base erosion minimum tax amount, which is computed by reference to modified taxable income.
  • Part VII describes general rules in proposed §1.59A-7 for applying the proposed regulations to partnerships.
  • Part VIII describes certain rules in the proposed regulations that are specific to banks and registered securities dealers.
  • Part IX describes certain rules in the proposed regulations that are specific to insurance companies.
  • Part X describes the anti-abuse rules in proposed §1.59A-9.
  • Parts XI-XIII address rules in proposed §1.1502-59A regarding the general application of the BEAT to consolidated groups.
  • Part XIV addresses proposed amendments to §1.383-1 to address limitations on a loss corporation’s items under section 382 and 383 in the context of the BEAT. P
  • art XV describes reporting and record keeping requirements.

Download Proposed BEAT Regulations

1 IRC § 59A.

2 IRC § 59A(e).

3 IRC § 59A(b).

4 IRC § 59A(d).

5 IRC § 59A(c)(4).

6 IRC § 59A(b).

7 IRC § 59A(b)(3).

December 13, 2018 in BEPS, Tax Compliance | Permalink | Comments (0)

Saturday, December 8, 2018

BVI Government Plans Legislation to Address EU Concerns on Economic Substance

The Premier announced that the BVI Government has responded constructively to the European Union’s listing exercise and will take all reasonable steps to address EU concerns relating to ‘economic substance’.  The Premier also announced that Cabinet has approved a Bill to meet this commitment. It is planned that the House of Assembly will be asked to consider the new legislation at the Sitting on Thursday 13 December, with the intention that the legislation will be in force by 31 December 2018 – the deadline set by the European Union.

The EU is compiling a list of non-cooperative jurisdictions on the basis of certain criteria it has set covering tax transparency, fair taxation and compliance with the OECD’s Base Erosion and Profit Shifting (BEPS) requirements. As part of this process the EU screened 92 countries in 2017 – including large nations such as the US and China. The BVI Government engaged positively with the EU throughout the screening process.

Due to the damage caused by the September 2017 hurricanes, a number of countries/jurisdictions, including the BVI, were given more time to commit to meeting the EU’s concerns. The Council of the EU accepted BVI’s commitment in March 2018.   The BVI meets the EU’s criteria when it comes to transparency, anti-BEPS measures and the general principles of ‘fair taxation’. However, the EU required further assurances from the BVI and other low or zero corporate income tax jurisdictions including Bermuda, the Cayman Islands and the Crown Dependencies on the issue of ‘economic substance’, set out in criterion 2.2 under the heading of ‘fair taxation’.

The new legislation will introduce economic substance requirements for all companies and limited partnerships which are registered and tax resident in the BVI. Every Corporate Service Provider registering a company that falls under the scope of the legislation will have to know where the company or limited partnership is tax resident and must be ready to relay that information to the BVI’s competent authorities.  If a company or limited partnership is tax resident in the BVI, it must demonstrate ‘economic substance’. Companies and limited partnerships that are tax resident in the BVI will have the opportunity to upskill those who work in the financial services sector through providing value-added services and increased sophistication of the sector. Companies and limited partnerships which are tax resident in BVI must, in relation to any relevant activity, carry out core income generating activities in BVI.

Relevant activities are: banking business, insurance business, fund management business, finance and leasing business, headquarters business, shipping business, holding business, intellectual property business, and distribution and service centre business.

The BVI is not alone in facing these challenges. But in every challenge there is an opportunity and the Government will engage closely with the BVI’s international business and financial services sector to ensure that the jurisdiction continues to provide services that benefit the global economy. The BVI is resilient. And the BVI is united in ensuring that we continue to put in place the conditions to allow existing sectors, and new sectors, of our economy to prosper and grow.”

Background In December 1997, the Council of the European Union adopted a resolution on a Code of Conduct for business taxation with the objective of curbing harmful tax competition and established the Code of Conduct Group (COCG) to oversee its implementation. In 2016, the European Union adopted criteria covering tax transparency, fair taxation and anti-base erosion and profit shifting (BEPS) against which countries were assessed during a screening process conducted by the COCG during 2017. No concerns were raised by the COCG regarding the BVI’s standards of tax transparency and implementation of anti-BEPS measures. The BVI was also regarded by the EU as compliant with the general principles of fair taxation. Jurisdictions with low or zero rates of corporate income tax were also assessed against criterion 2.2 (under the “fair taxation heading) which states: “The jurisdiction should not facilitate offshore structures or arrangements aimed at attracting profits which do not reflect real economic activity in the jurisdiction.” Following the screening process the COCG expressed concerns about BVI’s possible compliance with the criteria regarding a “legal substance requirement for entities doing business in or through the jurisdiction”. The COCG also expressed concern that the lack of legal substance requirements in BVI “increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial presence.”

In response, the Government made a commitment to implement reforms by the end of 2018 to ensure that BVI businesses have sufficient economic substance. Other jurisdictions (including the Crown Dependencies, Bermuda and the Cayman Islands) made similar commitments. The BVI was placed in “Annex II” of the list of jurisdictions produced by the COCG and endorsed by the EU Economic and Financial Affairs Council. Annex II lists jurisdictions that were identified as raising concerns but had made appropriate commitments to resolve them. The Government has entered into dialogue with the European Commission both in plenary sessions (with other jurisdictions) and bilateral meetings. Discussions have also taken place with individual EU Member States and with the OECD. The EU is expected to review legislation passed by BVI and other criterion 2.2 jurisdictions in early 2019. It is then the EU’s intention to announce an updated list of non-cooperative tax jurisdictions by March 2019. The OECD has recently adopted substantial activities requirements to be applied to jurisdictions that levy low or (like BVI) zero corporate income tax. This means that substance rules will no longer be a EU standard but will be a global standard. The BVI has always adhered to global standards and will continue to do so.

Read more at: http://bvifinance.vg/language/en-GB/News-Resources/ArticleID/3001/BVI-Government-Plans-Legislation-to-Address-EU-Concerns-on-Economic-Substance

To learn more about the British Virgin Islands' financial services, visit BVI Finance. Connect with us on FacebookTwitter, and LinkedIn.

Copyright © BVIFinance

December 8, 2018 in BEPS | Permalink | Comments (0)

Wednesday, December 5, 2018

Latin American Ministers launch regional initiative to combat tax evasion and corruption

Uruguay’s Minister of Economy and Finance Danilo Astori hosted  a discussion with Ministers, high level representatives and senior officials from Latin America on how to strengthen regional efforts to combat tax fraud and corruption. The meeting concluded with the signing of  the  the Punta del Este Declaration in which the Ministers and Deputy Ministers of Uruguay, Argentina, Panama and Paraguay agreed to:

  • Establish a Latin American initiative to maximise the effective use of the information exchanged under the international tax transparency standards to tackle tax evasion, corruption and other financial crimes.
  • Explore further means of cooperation including wider use of the information provided through exchange of tax information channels for other law enforcement purposes as permitted under the multilateral Convention on Mutual Administrative Assistance in Tax Matters and domestic laws, and also effective and real-time access to beneficial ownership information.
  • Establish national action plans to further the cooperation objectives and have representatives report on the progress made at the next plenary meeting of the Global Forum.

At the meeting, hosted by Uruguay in the margins of the 11th Global Forum Plenary, the gathered officials also encouraged other interested jurisdictions to join the regional initiative, with additional signatures anticipated in the near future. 

December 5, 2018 in BEPS, OECD, Tax Compliance | Permalink | Comments (0)

Thursday, November 22, 2018

OECD invites taxpayer input on seventh batch of Dispute Resolution peer reviews

Improving the tax treaty dispute resolution process is a top priority of the BEPS Project. The Mutual Agreement Procedure (MAP) peer review and monitoring process under Action 14 of the BEPS Action Plan was launched in December 2016 with the peer review process now well underway.

The peer review process is conducted in two stages. Under Stage 1, implementation of the Action 14 minimum standard is evaluated for Inclusive Framework members, according to the schedule of review. Stage 2 focuses on monitoring the follow-up of the recommendations resulting from jurisdictions' Stage 1 report. To date, four rounds of Stage 1 peer review reports covering 29 jurisdictions have been released.

The OECD is now gathering input for the Stage 1 peer reviews of Brazil, Bulgaria, China (People's Republic of), Hong Kong (China), Indonesia, Papua New Guinea, Russian Federation and Saudi Arabia, and invites taxpayers to submit input on specific issues relating to access to MAP, clarity and availability of MAP guidance and the timely implementation of MAP agreements for each of these jurisdictions using the taxpayer input questionnaire. As taxpayers are the main users of the MAP this input is key for the review process and we encourage taxpayers and associations of taxpayers (e.g. business and industry associations) to complete the questionnaire and return it to fta.map@oecd.org (in Word format) by 13 December 2018 at the latest.

For more information on the BEPS Action 14 peer review and monitoring process, visit: www.oecd.org/tax/beps/beps-action-14-peer-review-and-monitoring.htm

November 22, 2018 in BEPS, OECD | Permalink | Comments (0)

Friday, November 16, 2018

OECD releases latest results on preferential regimes and moves to strengthen the level playing field with zero tax jurisdictions

International efforts to curb harmful tax practices and prevent the misuse of preferential tax regimes are having a tangible impact worldwide, according to new data released today by the OECD.

The latest progress report from the Inclusive Framework on BEPS covers the assessment of 53 preferential tax regimes, demonstrating jurisdictions' continuing resolve to ensure that tax breaks are only offered to substantive activities and only if they do not pose risks of harmful competition to others.

The assessment process is part of ongoing implementation of Action 5 under the OECD/G20 Base Erosion and Profit Shifting Project. The assessments are undertaken by the Forum on Harmful Tax Practices (FHTP), comprising of the more than 120 member jurisdictions of the Inclusive Framework. Action 5 revamps the work on harmful tax practices with a focus on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for preferential regimes, such as IP regimes. The latest batch of assessments includes:

  • 18 regimes where jurisdictions have delivered on their commitment to make legislative changes to abolish or amend the regime (Andorra, Curaçao, Hong Kong (China), Mauritius, San Marino and Spain).
  • Four new or replacement regimes that have been specifically designed to meet Action 5 standard (Lithuania, Mauritius and San Marino).
  • New commitments to make legislative changes to amend or abolish a further 10 regimes, by Aruba, Australia, Maldives, Mongolia, Montserrat, the Philippines and Saint Lucia.
  • An additional 17 regimes that have been brought into the FHTP review process (Aruba, Brunei Darussalam, Curaçao, Gabon, Greece, Jordan, Kazakhstan, Malaysia, Panama, Paraguay, Saint Kitts and Nevis and the United States).
  • Four other regimes that have been found to be out of scope, not yet operational or were already abolished or without harmful features (Aruba, Kenya, Paraguay).

Having completed this latest set of reviews, the cumulative picture of the Action 5 regime review process is as follows, bringing the total number of regimes reviewed to 246:

Cumulative picture of the Action 5 regime review process

These results indicate the extent of continuing work to end harmful tax practices, and ensures that in the future all preferential regimes require real substance.

Given that all preferential regimes for geographically mobile income must now meet the Substantial Activities Requirements, it is essential to ensure that business activity does not simply relocate to a zero tax jurisdiction in order to avoid the substance requirements. This would tilt the playing field for those that have now changed their preferential regimes to comply with the standard and jeopardise the progress made in Action 5 to date. Against this backdrop, the Inclusive framework has decided to apply the Substantial Activities Requirement for "no or only nominal tax" jurisdictions.

"This new global standard means that mobile business income can no longer be parked in a zero tax jurisdiction without the core business functions having been undertaken by the same business entity, or in the same location," said Pascal Saint Amans, director of the OECD Centre for Tax Policy and Administration. "The Inclusive Framework's actions will ensure that substantial activities must be performed in respect of the same types of mobile business activities, regardless of whether they take place in a preferential regime or in a no or only nominal tax jurisdiction."

The FHTP will next meet in January 2019, to assess continuing reviews on the remaining regimes for which commitments to amend or abolish were made in 2017. Further discussion on all other regimes will take place through the FHTP review process in 2019. The FHTP will also work on the next steps for assessing compliance with the global standard for no or only nominal tax jurisdictions, and continue to report results to the Inclusive Framework.

November 16, 2018 in BEPS, OECD | Permalink | Comments (0)

Sunday, November 11, 2018

OECD and tax officials from Eastern Europe and Central Asia discuss BEPS implementation

Over 60 delegates from 16 countries, international and regional organisations, business, civil society and academia gathered in Yerevan, Armenia on 7-9 November 2018 for a regional meeting of the Inclusive Framework on BEPS in Eastern Europe and Central Asia. This was the latest in a series of regional meetings offering participants from different regions in the world the opportunity to provide their views and input into the Inclusive Framework on BEPS from a regional perspective and in a regional setting.

The event was hosted by the State Revenue Committee of the Republic of Armenia in co-operation with the OECD and the Intra-European Organisation of Tax Administrations (IOTA). Opened by the Chairman of the State Revenue Committee of Armenia, Mr. Davit Ananyan, the meeting was co-chaired by Ms. Nairuhi Avetisyan, Head of the Transfer Pricing and International Projects Division, State Revenue Committee of Armenia, and Mr. Wolfgang Büttner, Technical Taxation Expert at IOTA.

Participants shared and discussed the steps and actions taken in their respective jurisdictions to implement the BEPS measures which were released in October 2015. The meeting dealt with recent developments, in particular as regards to peer review mechanisms and timelines for the implementation of the four BEPS minimum standards and the signing of the Multilateral Instrument (MLI) to implement tax-treaty related BEPS measures. The meeting provided participants with the opportunity to work together on practical case studies on country-by-country reporting for the activities of multinational enterprises (BEPS Action 13), on preferential tax regimes and exchange of information on tax rulings (BEPS Action 5), as well as on treaty shopping and treaty abuse (BEPS Action 6).

Furthermore, the meeting gave an update on the transfer pricing follow-up work and the development of toolkits to support low-income countries. Participants discussed the range of capacity-building initiatives to strengthen countries' tax systems and administration including the joint OECD/UNDP initative Tax Inspectors Without Borders.

November 11, 2018 in BEPS | Permalink | Comments (0)

Monday, November 5, 2018

US Rejects Digital Economy Taxation Efforts by EU

Washington – U.S. Treasury Secretary Steven T. Mnuchin issued the following statement regarding digital tax proposals:

“Treasury is working very closely with the OECD and our counterparts there to address issues of base erosion and fair taxation.  We believe the issues are not unique to technology companies but also relate to other companies, particularly those with valuable intangibles.  I have instructed our team to continue their efforts in the OECD so that we can make progress on these issues quickly.  I highlight again our strong concern with countries’ consideration of a unilateral and unfair gross sales tax that targets our technology and internet companies.  A tax should be based on income, not sales, and should not single out a specific industry for taxation under a different standard.  We urge our partners to finish the OECD process with us rather than taking unilateral action in this area.”

November 5, 2018 in BEPS | Permalink | Comments (0)

Friday, November 2, 2018

Antigua and Barbuda, Dominica and Saint Vincent and the Grenadines join the Inclusive Framework on BEPS

Antigua and Barbuda, Dominica, Grenada, and St Vincent and the Grenadines have joined the OECD's inclusive framework on base erosion and profit shifting, bringing the total number of BEPS jurisdictions to 123.

November 2, 2018 in BEPS | Permalink | Comments (0)

Friday, October 26, 2018

Global Forum publishes compliance ratings on tax transparency for further seven jurisdictions

The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) published today seven peer review reports assessing compliance with the international standard on transparency and exchange of information on request (EOIR).

These reports assess jurisdictions against the updated standard which incorporates beneficial ownership information of all relevant legal entities and arrangements, in line with the definition used by the Financial Action Task Force Recommendations.

Two jurisdictions – Bahrain and Singapore – received an overall rating of “Compliant”. Five others – AustriaArubaBrazilSaint Kitts and Nevis and the United Kingdom were rated “Largely Compliant”. The jurisdictions have demonstrated their progress on many deficiencies identified in the first round of reviews including improving access to information, developing broader EOI agreement networks; and monitoring the handling of increasing incoming EOI requests as well as taking measures to implement the strengthened standard on the availability of beneficial ownership.

The Global Forum is the leading multilateral body mandated to ensure that jurisdictions around the world adhere to and effectively implement both the standard of transparency and exchange of information on request and the standard of automatic exchange of information. This objective is achieved through a robust monitoring and peer review process. The Global Forum also runs an extensive technical assistance programme to provide support to its members in implementing the standards and helping tax authorities to make the best use of cross-border information sharing channels.

The Global Forum also welcomed Oman as a new member. This takes its membership to 154 members who have come together to cooperate in the international fight against cross border tax evasion. 

For additional information on the Global Forum, its peer review process, and to read all reports to date, go to: http://www.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer-reviews_2219469x.

For further information, journalists should contact Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, (+33 6 2630 4923) or Monica Bhatia, Head of the Global Forum Secretariat (+ 33 1 4524 9746).


Watch this short cartoon video to know 

October 26, 2018 in BEPS | Permalink | Comments (0)

Tuesday, October 23, 2018

Global Forum publishes compliance ratings on tax transparency for further seven jurisdictions

The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Global Forum) published today seven peer review reports assessing compliance with the international standard on transparency and exchange of information on request (EOIR).

These reports assess jurisdictions against the updated standard which incorporates beneficial ownership information of all relevant legal entities and arrangements, in line with the definition used by the Financial Action Task Force Recommendations.

Two jurisdictions – Bahrain and Singapore – received an overall rating of “Compliant”. Five others – AustriaArubaBrazilSaint Kitts and Nevis and the United Kingdom were rated “Largely Compliant”. The jurisdictions have demonstrated their progress on many deficiencies identified in the first round of reviews including improving access to information, developing broader EOI agreement networks; and monitoring the handling of increasing incoming EOI requests as well as taking measures to implement the strengthened standard on the availability of beneficial ownership.

The Global Forum is the leading multilateral body mandated to ensure that jurisdictions around the world adhere to and effectively implement both the standard of transparency and exchange of information on request and the standard of automatic exchange of information. This objective is achieved through a robust monitoring and peer review process. The Global Forum also runs an extensive technical assistance programme to provide support to its members in implementing the standards and helping tax authorities to make the best use of cross-border information sharing channels.

The Global Forum also welcomed Oman as a new member. This takes its membership to 154 members who have come together to cooperate in the international fight against cross border tax evasion. 

For additional information on the Global Forum, its peer review process, and to read all reports to date, go to: http://www.oecd-ilibrary.org/taxation/global-forum-on-transparency-and-exchange-of-information-for-tax-purposes-peer-reviews_2219469x.

For further information, journalists should contact Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, (+33 6 2630 4923) or Monica Bhatia, Head of the Global Forum Secretariat (+ 33 1 4524 9746).


Watch this short cartoon video to know more about the work of the Global Forum

October 23, 2018 in BEPS | Permalink | Comments (0)

Friday, October 19, 2018

OECD and IGF release first set of practice notes for developing countries on BEPS risks in mining

For many resource-rich developing countries, mineral resources present a significant economic opportunity to increase government revenue. Tax base erosion and profit shifting (BEPS), combined with gaps in the capabilities of tax authorities in developing countries, threaten this prospect. The OECD’s Centre for Tax Policy and Administration and the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF) are collaborating to address some of the challenges developing countries face in raising revenue from their mining sectors. Under this partnership, a series of practice notes and tools are being developed for governments.

Three practice notes have now been finalised. In addition, interested parties were invited to provide comments on prelimary versions of these reports and are now publishing the public comments submitted. The OECD and IGF appreciate all feedback received.

Limiting the Impact of Excessive Interest Deductions on Mining Revenue

Building on BEPS Action 4, this practice note guides government policy-makers on how to strengthen their defences against excessive interest deductions in the mining sector.

Tax Incentives in Mining: Minimising Risks to Revenue

Supplementing wider work undertaken by the Platform for Collaboration on Tax on tax incentives, this practice note focuses on the use of tax incentives in mining specifically, examining the tax base erosion risks they can pose.

Monitoring the Value of Mineral Exports: Policy Options for Governments

Ensuring appropriate pricing of minerals relies on high-quality, accurate testing facilities and controls. This practice note helps governments choose the appropriate policy option for monitoring the value of mineral exports, considering the type of mineral, the risk of undervaluation, existing government capacities, and available budget.


About the OECD/IGF co-operation

The IGF and OECD Centre for Tax Policy and Administration have formed a partnership, combining the IGF’s mining expertise with the OECD’s knowledge of taxation, to design sector specific guidance on some of the most pressing base erosion challenges facing resource-rich developing countries.

This guidance reflects a broad consensus between the OECD Centre for Tax Policy and Administration Secretariat and the IGF, but should not be regarded as the officially endorsed view of either organisation or of their member countries.

Further information on the work of both organisations is available at:

October 19, 2018 in BEPS, OECD | Permalink | Comments (0)

Tuesday, October 9, 2018

2019 Dutch Budget: abolishment of the dividend withholding tax and introduction of earnings stripping and CFC rules

Loyens & Loeff announces that the 2019 Dutch Budget (the Budget) includes a proposal to abolish the existing dividend withholding tax, replacing it with a withholding tax on dividend payments to related entities in low-tax jurisdictions and in cases of abuse as of 1 January 2020.

In a separate proposal, implementing the EU Anti-Tax Avoidance Directive (ATAD1) new rules are introduced on the deductibility of interest (earnings stripping rules) and on taxation of Controlled Foreign Companies (CFC rules). The proposal also includes minor adjustments to the exit taxation rules for companies and broadly follows a preliminary proposal that was published for consultation purposes in 2017 (see our Tax Flash of 11 July 2017) and further clarifications provided by the Ministry of Finance early this year (see our Tax Flash of 23 February 2018). These provisions should enter into force per 1 January 2019.

read the full analysis in Loyens' newsflash here

October 9, 2018 in BEPS | Permalink | Comments (0)

Wednesday, September 26, 2018

IRS Issues Several Country-by-Country Reporting Reminders

1.  IRS Issues Reminder to U.S. MNEs Filing Form 8975 with no U.S. Schedule A (Form 8975)


When submitting Form 8975 and Schedules A (Form 8975), filers must attach at least two Schedules A (Form 8975) to the Form 8975. At least one Schedule A should be for the United States.

A U.S. MNE group with only fiscally transparent United States business entities would not provide a Schedule A for the United States, but would provide a Schedule A for “stateless” entities.

Filers who do not submit either a U.S. or stateless Schedule A (Form 8975) will receive a letter notifying them that an amended return must be filed to ensure their complete and accurate information is exchanged.

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2.  IRS Issues Reminder to U.S. MNEs of Instructions for Schedule A (Form 8975)


U.S. MNEs must submit a Schedule A (Form 8975) for each tax jurisdiction in which one or more constituent entities is tax resident. The tax jurisdiction field in Part I of Schedule A is a mandatory field, and U.S. MNEs are required to enter a two-letter code for the tax jurisdiction to which the Schedule A pertains. The country code for the United States is “US” and the country code for “stateless” is “X5.” All other country codes can be found at www.IRS.gov/CountryCodes.

Form 8975 and Schedule A information is exchanged using the OECD Country Code List that is based on the ISO 3166-1 Standard. Although the country codes found in the IRS link above contain the jurisdictions listed in the table below, those jurisdictions do not correspond to a valid OECD country code for purposes of exchanging the information. Therefore, do not enter any of these country codes on the tax jurisdiction line of Part I of Schedule A.

Tax Jurisdiction Country Code
Akrotiri AX
Ashmore and Cartier Islands AT
Clipperton Island IP
Coral Sea Islands CR
Dhekelia DX
Paracel Islands PF
Spratly Islands PG
Other Country OC

If the tax jurisdiction specified in the above list is associated with a larger sovereignty, use the country code for the larger sovereignty with which the tax jurisdiction is associated (e.g., Akrotiri and Dhekelia are considered a British Overseas Territory, so the country code for the United Kingdom would be used (“UK”)). Otherwise, use a separate Schedule A for “stateless” using the tax jurisdiction code “X5”.  In either case, you should include in Part III of Schedule A the name of the specific constituent entity and the jurisdiction where the constituent entity is located.

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3.  IRS Issues Reminder to U.S. MNEs of Procedures for Mailing Page 1 of Paper-Filed Form 8975 to the Ogden Mailbox


If a U.S. MNE files Form 8975 and Schedule A (Form 8975) on paper, the MNE should mail a copy of only page 1 of Form 8975 to Ogden to notify the IRS that Form 8975 and Schedules A (Form 8975) have been filed with a paper return.

If a U.S. MNE files Form 8975 and Schedules A (Form 8975) electronically, the filer should not mail a copy of page 1 of Form 8975 to the Ogden mailbox.

See the Instructions for Form 8975 and Schedule A (Form 8975) for further guidance.

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4.  IRS Issues Reminder to U.S. MNEs of Procedures for Amending Form 8975


If a U.S. MNE files Form 8975 and Schedules A (Form 8975) that the MNE later determines should be amended, the MNE must file an amended Form 8975 and all Schedules A (Form 8975), including any that have not been amended, with its amended tax return. The U.S. MNE should use the amended return instructions for the return with which Form 8975 and Schedules A were originally filed and check the amended report checkbox at the top of Form 8975.  Note that the amended return (with the amended Form 8975 and all Schedules A) must be filed using the same method (electronically or by paper) as the original submission.  In other words, if the U.S. MNE is required to e-file an original return and need to file an amended or superseding return, the amended return must also be e-filed.  Note that for the paper filer, it must also submit page 1 of Form 8975 to Ogden.

September 26, 2018 in BEPS, Tax Compliance | Permalink | Comments (0)

Tuesday, September 25, 2018

Public comments received on BEPS discussion draft on the transfer pricing aspects of financial transactions

On 3 July 2018, interested parties were invited to provide comments on a discussion draft on financial transactions, which deals with follow-up work in relation to Actions 8-10 (“Assure that transfer pricing outcomes are in line with value creation”) of the BEPS Action Plan. The OECD is grateful to the commentators for their input and now publishes the public comments received.  Download all the received comments on the BEPS discussion draft on the transfer pricing aspects of financial transactions:

September 25, 2018 in BEPS | Permalink | Comments (0)

Monday, September 24, 2018

OECD releases further guidance for tax administrations and MNE Groups on Country-by-Country reporting (BEPS Action 13)

The Inclusive Framework on BEPS has released additional interpretative guidance to give certainty to tax administrations and MNE Groups alike on the implementation of Country-by-Country (CbC) Reporting (BEPS Action 13).

The new guidance includes questions and answers on the treatment of dividends received and the number of employees to be reported in cases where an MNE uses proportional consolidation in preparing its consolidated financial statements, which apply prospectively. The updated guidance also clarifies that shortened amounts should not be used in completing Table 1 of a country-by-country report and contains a table that summarises existing interpretative guidance on the approach to be applied in cases of mergers, demergers and acquisitions.

The complete set of guidance concerning the interpretation of BEPS Action 13 issued so far is presented in the document released today. This will continue to be updated with any further guidance that may be agreed.

Also today, a set of newly established bilateral exchange relationships under the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (CbC MCAA) were published with respect to Bermuda, Curaçao, Hong Kong (China) and Liechtenstein. An overview of all CbC MCAA exchange relationships is available.

September 24, 2018 in BEPS | Permalink | Comments (0)

Saudi Arabia signs landmark agreement to strengthen its tax treaties

Saudi Arabia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the Convention). Saudi Arabia becomes the 84th jurisdiction to join the Convention, which now covers over 1,400 bilateral tax treaties.

The Convention is the first multilateral treaty of its kind, allowing jurisdictions to integrate results from the OECD/G20 BEPS Project into their existing networks of bilateral tax treaties. The OECD/G20 BEPS Project delivers solutions for governments to close the gaps in existing international rules that allow corporate profits to "disappear" or be artificially shifted to low or no tax environments, where companies have little or no economic activity. Treaty shopping, in particular, is estimated to reduce the effective withholding tax rate by more than 5 percentage points from nearly 8% to 3%, generating large revenue losses for developed and developing countries.

The Convention, negotiated by more than 100 countries and jurisdictions under a mandate from the G20 Finance Ministers and Central Bank Governors, is one of the most prominent results of the OECD/G20 BEPS project. It is the world's leading instrument for updating bilateral tax treaties and reducing opportunities for tax avoidance by multinational enterprises. Measures included in the Convention address hybrid mismatch arrangements, treaty abuse, and strategies to avoid the creation of a "permanent establishment". The Convention also enhances the dispute resolution mechanism, especially through the addition of an optional provision on mandatory binding arbitration, which has been taken up by 28 jurisdictions.

 

The text of the Convention, the explanatory statement, background information, database, and positions of each signatory are available at http://oe.cd/mli.

September 24, 2018 in BEPS | Permalink | Comments (0)

Thursday, September 20, 2018

State aid: Commission investigation did not find that Luxembourg gave selective tax treatment to McDonald's

The Commission has found that the non-taxation of certain McDonald's profits in Luxembourg did not lead to illegal State aid, as it is in line with national tax laws and the Luxembourg-United States Double Taxation Treaty.

At the same time, the Commission welcomes steps taken by Luxembourg to prevent future double non-taxation.

Commissioner Margrethe Vestager, in charge of competition policy, said: "The Commission investigated under EU State aid rules whether the double non-taxation of certain McDonald's profits was the result of Luxembourg misapplying its national laws and the Luxembourg-US Double Taxation Treaty, in favour of McDonald's. EU State aid rules prevent Member States from giving unfair advantages only to selected companies, including through illegal tax benefits. However, our in-depth investigation has shown that the reason for double non-taxationin this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, Luxembourg did not break EU State aid rules.

Of course, the fact remains that McDonald's did not pay any taxes on these profits – and this is not how it should be from a tax fairness point of view. That's why I very much welcome that the Luxembourg Government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future."

Following an in-depth investigation launched in December 2015, based on doubts that Luxembourg might have misapplied its Double Taxation Treaty with the United States, the Commission has concluded that Luxembourg's tax treatment of McDonald's Europe Franchising does not violate the Double Taxation Treaty with the United States. On that basis the tax rulings granted to McDonald's do not infringe EU State aid rules.

McDonald's Europe Franchising corporate structure

McDonald's Europe Franchising is a subsidiary of McDonald's Corporation, based in the United States. The company is tax resident in Luxembourg and has two branches, one in the United States and the other in Switzerland. In 2009, McDonald's Europe Franchising acquired a number of McDonald's franchise rights from McDonald's Corporation in the United States, which it subsequently allocated internally to the US branch of the company.

As a result, McDonald's Europe Franchising receives royalties from franchisees operating McDonald's fast food outlets in Europe, Ukraine and Russia for the right to use the McDonald's brand.

McDonald's Europe Franchising also set up a Swiss branch responsible for the licensing of the franchise rights to franchisors and through which royalty payments flowed from Luxembourg to the US branch of the company.

McDonald's tax rulings in Luxembourg

In March 2009, the Luxembourg authorities granted McDonald's Europe Franchising a first tax ruling confirming that the company did not need to pay corporate tax in Luxembourg since the profits would be subject to taxation in the United States. This was justified by reference to the Luxembourg – US Double Taxation Treaty, which exempts income from corporate taxation in Luxembourg, if it may be taxed in the United States. Under this first ruling, McDonald's Europe Franchising was required to submit proof every year to the Luxembourg tax authorities that the royalties transferred to the United States via Switzerland were declared and subject to taxation in the United States and in Switzerland.

Following this first tax ruling, the Luxembourg authorities and McDonald's engaged in discussions concerning the taxable presence of McDonald's Europe Franchising in the United States (a so-called "permanent establishment"). McDonald's claimed that although the US branch was not a "permanent establishment" according to US tax law, it was a "permanent establishment" according to Luxembourg tax law. As a result, the royalty income should be exempt from taxation under Luxembourg corporate tax law.

The Luxembourg authorities ultimately agreed with this interpretation and, in September 2009, issued a second tax ruling according to which McDonald's Europe Franchising was no longer required to prove that the royalty income was subject to taxation in the United States.

Commission assessment

The role of EU State aid control is to ensure that Member States do not give selected companies a better treatment than others, through tax rulings or otherwise. In this context, the Commission's in-depth investigation assessed whether the Luxembourg authorities selectively derogated from the provisions of their national tax law and the Luxembourg – US Double Taxation Treaty and gave McDonald's an advantage not available to other companies subject to the same tax rules.

The Commission concluded that this was not the case.

In particular, it could not be established that the interpretation given by the second tax ruling to the Luxembourg – US Double Taxation Treaty was incorrect, although it resulted in the double non-taxation of the royalties attributed to the US branch. Therefore, the Commission found that the Luxembourg authorities did not misapply the Luxembourg –US Double Taxation Treaty and that the tax advantage conferred to McDonald's Europe Franchising cannot be considered State aid.

McDonald's Europe Franchising's US branch did not fulfil the relevant provisions under the US tax code to be considered a permanent establishment.

At the same time, the Commission found that the Luxembourg authorities could exempt the US branch of McDonald's Europe Franchising from corporate taxation without violating the Double Taxation Treaty because the US branch could be considered a permanent establishment according to Luxembourg tax law. Under the relevant provision in the Luxembourg tax code, the business carried on by the US branch of McDonald's Europe Franchising fulfilled all the conditions of a permanent establishment under Luxembourg tax law.

Therefore, the Commission concluded that the Luxembourg authorities did not misapply the Luxembourg – US Double Taxation Treaty by exempting the income of the US branch from Luxembourg corporate taxation.

Preventing future double non-taxation in Luxembourg

This interpretation of the Luxembourg – US Double Taxation Treaty led to double non-taxation of the franchise income of McDonald's Europe Franchising.

The Luxembourg government presented on 19 June 2018 draft legislation to amend the tax code to bring the relevant provision into line with the OECD's Base Erosion and Profit Shifting project and to avoid similar cases of double non-taxation in the future. This is currently being discussed by the Luxembourg Parliament.

Under the proposed new provision, the conditions to determine the existence of a permanent establishment under Luxembourg law would be strengthened. In addition, Luxembourg would be able to, under certain conditions, require companies that claim to have a taxable presence abroad to submit confirmation that they are indeed subject to taxation in the other country.

Background

Tax rulings as such are not a problem under EU State aid rules, if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective tax advantage to specific companies can distort competition within the EU's Single Market, in breach of EU State aid rules.

Since June 2013, the Commission has been investigating individual tax rulings of Member States under EU State aid rules. It extended this information inquiry to all Member States in December 2014.

Regarding investigations concerning tax rulings that have already been concluded by the Commission:

  • In October 2015, the Commission concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively. As a result of these decisions, Luxembourg recovered €23.1 million from Fiat and the Netherlands recovered €25.7 million from Starbucks.
  • In January 2016, the Commission concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, under its "excess profit" tax scheme are illegal under EU State aid rules. The total amount of aid to be recovered from 35 companies is estimated at approximately €900 million, including interest. Belgium has already recovered over 90% of the aid.
  • In August 2016, the Commission concluded that Ireland granted undue tax benefits to Apple, which led to a recovery by Ireland of €14.3 billion.
  • In October 2017, the Commission concluded that Luxembourg granted undue tax benefits to Amazon, which led to a recovery by Luxembourg of €282.7 million.
  • In June 2018, the Commission concluded that Luxembourg granted undue tax benefits to Engie of around €120 million. The recovery procedure is still ongoing.

The Commission also has one ongoing in-depth investigation concerning tax rulings issued by the Netherlands in favour of Inter IKEA, and one investigation concerning a tax scheme for multinationals in the United Kingdom.

Statement by Commissioner Vestager on Commission decision that the non-taxation of certain McDonald's profits in Luxembourg is not illegal State aid

The Commission has today decided that the non-taxation of certain McDonald's profits in Luxembourg is not illegal State aid.

Our case concerned two tax rulings granted by Luxembourg to McDonald's in 2009. These exempt from taxation in Luxembourg all franchise profits that McDonald's receives from third parties operating McDonald's outlets in Europe, the Ukraine and Russia. In the first ruling, Luxembourg falsely assumed that these profits were taxable in the US. They were not. In the second ruling, Luxembourg then removed any obligation on McDonald's to prove that the revenues were taxable in the US. This means that these profits were neither taxed in Luxembourg nor the US.

The Commission investigated under EU State aid rules whether this double non-taxation was the result of Luxembourg misapplying its national laws and the Luxembourg-US Double Taxation Treaty, in favour of McDonald's. EU State aid rules prevent Member States from giving unfair advantages only to selected companies, including through illegal tax benefits.

However, our in-depth investigation has shown that the reason for double non-taxation in this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, we concluded that Luxembourg did not break EU State aid rules.

Details of the McDonald's structure

First, let me tell you a bit more about the facts of the case.

Our case concerns McDonald's Europe Franchising, a Luxembourg-based subsidiary of the McDonald's Corporation. This company also has a branch in the US.

McDonald's Europe Franchising owns the rights to the McDonald's brand and other related rights. It licenses these rights to third parties, who operate the McDonald's fast food outlets and pay franchise fees to McDonald's Europe Franchising.

In February 2009, McDonald's Europe Franchising contacted the Luxembourg tax authorities to ask for a tax ruling confirming that profits from its franchise rights would not be taxable in Luxembourg. McDonald's claimed that this was because these rights are attributed to its US branch. It further argued that the Luxembourg – US Double Taxation Treaty exempts from taxation in Luxembourg any income that may be taxed in the US, if the company has a taxable presence there, for example through a branch.

In March 2009, the Luxembourg authorities issued a first tax ruling agreeing to McDonald's interpretation of the Double Taxation Treaty. At the same time, they requested that the company provide proof that the income of the US branch had been declared and could indeed be taxed in the US.

However, six months later, the Luxembourg tax authorities issued a second tax ruling that removed this requirement to submit proof. In other words, Luxembourg confirmed that the income is exempt from taxation in Luxembourg as well, even though it is not taxable at the US branch.

The State aid investigation

You may wonder how Luxembourg can rely on a Treaty meant to avoid double taxation to endorse double non-taxation. We asked ourselves the same question, which is why we opened a State aid investigation in December 2015.

The purpose of such investigations is to give the Member State and company concerned, as well as other third parties, the opportunity to submit their views on the Commission's preliminary concerns. We then carefully assess them.

The short summary of our conclusion in this case is that the Double Taxation Treaty between Luxembourg and the US explains Luxembourg's tax treatment of McDonald's. Luxembourg did not misapply the Treaty in a selective manner and, on that basis, did not break EU State aid rules.

The more complicated answer starts with a taxation concept called "permanent establishment". If a company has a "permanent establishment" in a specific country, this means that it carries out business and has a taxable presence there.

The Luxembourg – US Double Taxation Treaty says that Luxembourg cannot tax the profits of companies, if they may be taxed in the US because they have a permanent establishment there. Luxembourg can assume that the income of this permanent establishment is taxed in the US.

However, whether a permanent establishment exists in the US is assessed differently by the US and by the Luxembourg tax authorities, under their respective tax codes.

The US did not consider the US branch of McDonald's Europe Franchising to be a permanent establishment under its tax law, and so did not tax the profits of this US branch. However, the Luxembourg authorities considered that the same US branch fulfilled all the conditions necessary to be a permanent establishment under Luxembourg tax law. It therefore exempted this income from Luxembourg taxation in line with the Double Taxation Treaty.

The result was double non-taxation of the income by Luxembourg and the US. However, this was not due to any special treatment awarded by Luxembourg to McDonald's, which was the issue that our investigation under EU State aid rules focused on. In other words, Luxembourg's tax treatment of McDonald's is not illegal under EU State aid rules.

As usual, we will publish the non-confidential version of our decision as soon as we have agreed with Luxembourg on any business secrets that need to be removed from it.

New Luxembourg tax rules

Of course, the fact remains that McDonald's did not pay any taxes in Luxembourg on these profits – and this is not how it should be from a tax fairness point of view.

That's why I very much welcome that the Luxembourg Government is taking legislative steps to address the issue that arose in this case and avoid such situations in the future.

Among other things, Luxembourg will strengthen the criteria under its tax code to define a permanent establishment. This proposal is currently with the Luxembourg parliament. Once adopted, the new provision will require the taxpayer, in certain circumstances, to provide a certificate of residence in the other country, if it wants to benefit from a tax exemption in Luxembourg. This would be proof that the other country recognises the existence of a taxable permanent establishment of that company. This new provision is presented to the Luxembourg parliament together with other measures to transpose the EU's Anti-Tax-Avoidance Directive.

Over the past few years, we have seen an international determination to deal with the issue of tax avoidance. Through closing loopholes in tax laws and working on the OECD's Base Erosion and Profit Shifting Project.

Also within the EU, under the responsibility of my colleagues Valdis Dombrovskis and Pierre Moscovici, the Commission has pursued a coherent strategy towards fair taxation and greater transparency. And Member States have been using the momentum to reform their corporate taxation framework, to make it both fairer and more efficient.

Progress on recovery cases

Finally, I would like to update you on significant progress made on the implementation of Commission decisions requiring Member States to recover unpaid taxes. This is important because otherwise companies continue to benefit from an illegal advantage.

In May, Luxembourg completed the recovery of more than 280 million euros from Amazon, of which 21 million euros is interest.

I am also happy to confirm that Ireland has now recovered the full illegal aid from Apple. The final amount recovered is 14.3 billion euros, of which about 1.2 billion euros is interest. This money will be held in an escrow account, pending the outcome of the ongoing appeal of the Commission's decision before the EU courts. This means that we can proceed to closing the infringement procedure against Ireland for failure to implement the decision.

These are important steps forward to tackling multinationals' tax avoidance and to meeting our ultimate goal of ensuring that all companies, big or small, pay their fair share of tax in the future.

September 20, 2018 in BEPS | Permalink | Comments (0)

Ireland confirms US$15B recovery of the alleged State Aid from Apple

The Minister for Finance and Public Expenditure and Reform, Paschal Donohoe TD, on behalf of the Government, confirms that the full recovery of the alleged State Aid from Apple has been completed. Over the course of Q2 and Q3 2018, Apple deposited c. €14.3 billion into the Escrow Fund which represents the full recovery of the alleged State Aid of c. €13.1 billion plus EU interest of c. €1.2 billion.

The full recovery of the alleged State Aid is a significant milestone and is in line with the commitment given earlier in the year that the alleged State Aid would be recovered by end Q3 2018.

Notwithstanding the fact that the Government does not accept the Commission’s analysis in the Apple State Aid decision and have lodged an appeal with the European Courts, the collection of the alleged State Aid from Apple demonstrates that it was always the Government’s intention to comply with its legal obligations.

Speaking today Minister Donohoe said: ‘While the Government fundamentally disagrees with the Commission’s analysis in the Apple State Aid decision and is seeking an annulment of that decision in the European Courts, as committed members of the European Union, we have always confirmed that we would recover the alleged State aid.  We have demonstrated this with the recovery of the alleged State Aid which will be held in the Escrow Fund pending the outcome of the appeal process before the European Courts’. 

“This is the largest State Aid recovery at c. €14.3 billion and one of the largest funds of its kind to be established. It has taken time to establish the infrastructure and legal framework around the Escrow Fund but this was essential to protect the interests of all parties to the agreement.”

ENDS

Notes to editors

Recovery of alleged State Aid

  1. The State has recovered the alleged State Aid from Apple. The total amount is €14.285 billion (which is the principal amount and relevant EU interest). The final payment was made in early September.
  2. There has been continuous and extensive engagement with the Commission Services throughout the recovery process, including in relation to agreeing the amount of the alleged State Aid and the relevant EU interest.
  3. The alleged State Aid has been placed into an Escrow Fund with the proceeds being released only when there has been a final determination in the European Courts over the validity of the Commission’s Decision.
  4. Notwithstanding the appeal in the Apple State Aid case and the difference in view between Ireland and the Commission on the issue, the Government has always been committed to complying with the binding legal obligations the Commission’s Final Decision places on Ireland. 
  5. Significant developments during 2018:
  • On 7 March 2018, the Department of Finance confirmed that the Bank of New York Mellon, London Branch, was selected as preferred tenderer for the provision of escrow agency and custodian services following a competitive tender process.
  • On 23 March 2018, the Department of Finance confirmed that Amundi, BlackRock Investment Management (UK) Limited and Goldman Sachs Asset Management International were selected as preferred tenderers for the provision of investment management services.
  • On 24 April 2018, the Minister for Finance confirmed that the Escrow Framework Deed, which sets out the detailed legal agreement regarding the recovery of the alleged State Aid was signed by the Minister and Apple.  
  • On 18 May 2018, the Minister for Finance confirmed that the collection of the alleged State Aid had commenced.

Infringement proceedings

6. In October 2017, the European Commission announced the intention to launch infringement proceedings against Ireland over the recovery of the alleged Apple State Aid.  As recovery of the alleged State Aid has now been effected, it is now hoped that these proceedings will be withdrawn by the Commission. The Irish Government is in discussion with the Commission in respect of this. 

Appeal on State Aid case

7. The Government profoundly disagrees with the Commission’s analysis in the Apple State Aid case. An appeal is therefore being brought before the European Courts in the form of an application to the General Court of the European Union (GCEU), asking it to annul the Decision of the Commission.

8. The case has been granted priority status and is progressing through the various stages of private written proceedings before the GCEU. It is at the discretion of the Court to determine if there will be oral proceedings, either in public or in private.

9. It will likely be several years before the matter is ultimately settled by the European Courts.

September 20, 2018 in BEPS | Permalink | Comments (0)